Acctg405 Q6

ACCTG 405: Accounting for Government, Non-Profit Entities, and Specialized Industries
QUIZ NO. 6 – Basic Derivatives
NAME: SCORE:
SECTION: ABP5 – DATE:
Instruction: Read and understand each problem very carefully. Supply what is being required in each item. (2pts.
each)
PROBLEM A: Berlin Company operates a seafood restaurant around Binondo, Manila. On October 1, 2019, Berlin
Company determined that it will need to purchase 100,000 kilos of giant clams on March 1, 2020.
Because of the volatile fluctuation in the price of giant clams, on October 1, 2019, the company negotiated a forward
contract with BPI to purchase 100,000 kilos of giant clams on March 1, 2020 at a price of P100 per kilo. This forward
contract was designated as a cash flow hedge.
On December 31, 2019, the market price per kilo of giant clams is P120 and on March 1, 2020, the market price is
P116.
1. What amount shall be presented as derivative asset or liability on December 31, 2019? (Indicate
whether DERIVATIVE ASSET or DERIVATIVE LIABILITY)
2. What is the fair value of the derivative asset or liability on March 1, 2020 prior to settlement? (Indicate
3. What amount shall be recognized as purchases on March 1, 2020?
4. How much is the net cash settlement between Berlin Company and the speculator? (Indicate whether
TO SPECULATOR or FROM SPECULATOR)
PROBLEM B: Oslo Company operates a seafood restaurant around Quezon City. On October 1, 2019, Oslo
Company determined that it will need to purchase 100,000 kilos of deluxe fish on March 1, 2020.
Because of the volatile fluctuation in the price of deluxe fish, on October 1, 2019, the company negotiated a forward
contract with BPI to purchase 100,000 kilos of deluxe fish on March 1, 2020 at a price of P100 per kilo. This forward
contract was designated as a cash flow hedge.
On December 31, 2019, the market price per kilo of deluxe fish is P90 and on March 1, 2020, the market price is P80.
5. What amount shall be presented as derivative asset or liability on December 31, 2019? (Indicate
6. What is the fair value of the derivative asset or liability on March 1, 2020 prior to settlement? (Indicate
7. What amount shall be recognized as purchases on March 1, 2020?
8. How much is the net cash settlement between Oslo Company and the speculator? (Indicate whether
PROBLEM C: On December 1, 2019, Salva Company determined that it will need to purchase 1,000 units of
material X on June 30, 2020. Material X is selling at P500 per unit on December 1, 2019. The company is concerned
with the movement of prices of the raw material between December 1, 2019 and June 30, 2020.
As a protection against the increase in price of material X, the company entered into an option contract with a speculator
by paying P5,000 for the option on December 1, 2019. The contract gives the company the right to purchase 1,000
units of the material X at P500 per unit. The call option was designated as a cash flow hedge.
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The market price of material X on December 31, 2019 and June 30, 2020 are P510 and P480, respectively.
9. What is the derivative asset or liability on December 31, 2019? (Indicate whether DERIVATIVE ASSET
or DERIVATIVE LIABILITY)
10. What amount shall be recognized as purchases on June 30, 2020?
11. How much is the net cash settlement to or from the speculator on June 30, 2020? (Indicate whether
PROBLEM D: On January 1, 2016, Denver Company borrowed P100,000,000 from a bank at a variable rate of
interest for 5 years. Interest will be paid annually to the bank every December 31 and the principal is due on December
31, 2020. Under the agreement, the market rate of interest every January 1 resets the variable rate for that period and
the amount of interest to be paid on December 31.
In conjunction with the loan, the company entered into a “receive variable, pay fixed” interest rate swap agreement with
another bank speculator. The interest rate swap agreement was designated as a cash flow hedge. The market rates
of interest are:
January 1, 2016 8%
January 1, 2017 12%
January 1, 2018 13%
January 1, 2019 9%
January 1, 2020 7.5%
The PV of an ordinary annuity of 1 is 3.04 at 12% for four periods, 2.36 at 13% for three periods, 1.76 at 9% for two
periods, and 0.93 at 7.5% for one period.
12. What is the notional amount of the interest rate swap agreement?
15. What amount of interest expense should be reported for 2017?
20. How much is the net cash settlement between the company and the speculator on December 31, 2020?
(Indicate whether TO SPECULATOR or FROM SPECULATOR)
-END-
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ACCTG 405: Accounting for Government, Non-Profit Entities, and Specialized Industries

QUIZ NO. 6 – Basic Derivatives

SECTION: ABP5 – DATE:

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